'Code of conduct' set for student loans

New York Attorney General Andrew Cuomo's Code of Conduct for student loan marketers, designed to make it easier for students to compare the terms of loans offered through direct marketing, has gathered support from the industry.

As a part to his ongoing investigation into questionable marketing practices by student loan companies, Cuomo released the eight-point Code of Conduct earlier this month. That release came nearly a month and a half after the attorney general subpoenaed 33 companies that sell their products directly to students through television, Internet and direct mail.

To date, the investigation has already resulted in agreements with 13 student loan companies, including the eight largest lenders in America — Citibank, Sallie Mae, Nelnet, JP Morgan Chase, Bank of America, Wells Fargo, Wachovia and College Loan Corporation.

“We were an early signer of the code of conduct,” says Tom Kelly, SVP at Chase. “We think it makes sense to have all lenders operate under same rules and it makes sense to treat students honestly because we hope to have a long term relationship with them.”

“Sallie Mae has always believed that our products, services, and actions have been in the best interest of students,” she says via e-mail. “That's why we strongly support initiatives, like this one, that lead to greater transparency and enhanced clarity for students and families who are planning to pay for college.”

Most recently, on December 11, Student Financial Services Inc. (SFS), which also operates under the banner of University Financial Services, settled charges that it had agreed to pay some of the nation's top universities, school athletic departments and sports marketing firms for generating loan applications. SFS had contracts at 63 colleges nationwide, including Georgetown University, Wake Forest University, Rutgers University and Florida State University. SFS was not available for comment at press time.

“There was some issue about incentives to financial aid officers and some entertainment to financial aid officers and it wasn't clear what the rules were,” says Kelly, of the charges against student loan companies. “Once everybody knows what the rules are, it seems pretty straightforward.”

Under the new agreement, companies have to sign a uniform disclosure statement requiring them to list an annual percentage rate and provide students with an estimate of what their monthly payment would be and the amount they would pay for the life of the loan. Lenders cannot use false insignia or other devices that appear to be part of the federal government. They also are barred from using checks, deceptive rebate offers or other gimmicks to entice students.

Lenders are also prohibited from using gift cards, sweepstakes, contests, or prizes to entice students to sign up for their loans. Financial institutions cannot levy prepayment or early payment penalties to students. Finally, they are also required to tell students that they can get the best deal through federal loans.

Kelly believes that the code of conduct will have a lasting effect on consumers.

“I think it will create a level playing field,” he says. “The biggest impact on the market is the reduction in the federal subsidy for student loans, which will make them more expensive and continually grow the gap between the cost of education and a family's ability to pay for it out of pocket.”